Question 1

Which of the following policies would supply-side economists favor?

Accepted Answer

The answer of Which of the following policies would supply-side...

Question 2

In 2009, the Obama administration advocated and Congress passed a massive spending and tax relief package of about $800 billion to stimulate aggregate demand. This policy would be favored by

Accepted Answer

Keynesian economics emphasizes the role of government intervention in stabilizing the economy during times of recession by increasing government spending and decreasing taxes to stimulate aggregate demand. New Keynesian economists also support government intervention but emphasize the importance of microeconomic frictions in the economy. Monetarists and new classical economists, on the other hand, believe that monetary policy is more effective than fiscal policy in stabilizing the economy and advocate for a more limited role for government intervention.

Question 3

A 2010 survey of economists suggested that the _______ approach is the preferred approach to macroeconomic analysis.

Accepted Answer

The survey found that the new Keynesian approach was the preferred approach to macroeconomic analysis among economists in 2010. This approach combines elements of both Keynesian and monetarist theories, and emphasizes the importance of imperfect competition and sticky prices in explaining economic fluctuations.

Question 4

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

Accepted Answer

The Great Depression of the 1930s was the worst economic downturn in the United States in the twentieth century.

Question 5

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

Accepted Answer

Congress was concerned that expansionary policies would increase the government budget deficit. This concern was driven by a belief that increasing the deficit would lead to higher interest rates, which would then offset any benefits of an expansionary fiscal policy by reducing private investment and consumption. Additionally, policymakers may have been hesitant to increase the deficit due to political pressure to reduce government spending and balance the budget.

Question 6

New Keynesian economics

Accepted Answer

New Keynesian economics emphasizes the stickiness of prices and wages, and the need for activist stabilization policies through aggregate demand management to bring the economy to its potential output. It does not advocate for increasing wage and price flexibility, nor does it prioritize shifting the long-run aggregate supply curve.

Question 7

Which of the following is true about new Keynesian economics?
I. It incorporates monetarist ideas about the importance of monetary policy.
II. It incorporates new classical ideas about the importance of aggregate supply.
III. It includes a greater use of microeconomic analysis in macroeconomic analysis than Keynesian economics.
IV. Unlike Keynesian economics, it is opposed to active stabilization policies.

Accepted Answer

The answer of Which of the following is true about...

Question 8

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point a. Assume that (1) the public's expectations are completely rational; (2) markets allocate resources instantaneously; and (3) the economy is at its natural level of employment. The theoretical adjustment path resulting from an increase in aggregate demand according to the rational expectations hypothesis is

Accepted Answer

The answer of Figure 17-3 
-Refer to Figure 17-3. Suppose...

Question 9

Classical economics is based primarily on the works of John Maynard Keynes.

Accepted Answer

Classical economics is based primarily on the works of Adam Smith, David Ricardo, and Thomas Malthus, while Keynesian economics is based primarily on the works of John Maynard Keynes.

Question 10

Which of the following was not an explanation for the lower volatility of the U.S. economy during the 25-year period that preceded the Great Recession?

Accepted Answer

The answer of Which of the following was not an...

Question 11

Suppose the economy is initially in long-run equilibrium. Now suppose oil prices rise sharply and at the same time, policymakers pursue expansionary monetary and fiscal policies. Which of the following will occur as a result of these two events?

Accepted Answer

The rise in oil prices will increase production costs and shift the short-run aggregate supply (SRAS) curve to the left, reducing output and increasing the price level. However, expansionary monetary and fiscal policies will increase aggregate demand and shift the aggregate demand (AD) curve to the right, increasing output and potentially increasing the price level further. The net effect on output is uncertain, as it depends on the relative magnitudes of the shifts in the AD and SRAS curves. However, the price level will necessarily rise in this scenario.

Question 12

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century in the U.S. Public opinion polls in 1979 consistently showed that most people regarded inflation as the leading problem facing the U.S. How did the Fed respond to this situation?

Accepted Answer

In response to the high inflation rate, the Fed pursued contractionary policies with the primary goal of lowering inflation. These policies included increasing the federal funds rate and reducing the growth rate of the money supply. The Fed believed that controlling inflation was essential to maintaining the long-term health of the economy, even if it meant causing a short-term economic slowdown.

Question 13

In the late 1970s, oil prices rose sharply and at the same time, U.S. policymakers pursued expansionary fiscal and monetary policies. As a result, real GDP stayed at potential output, while the implicit price deflator jumped 8.1%. If the Fed's goal was to reduce inflation, which of the following would also occur?

Accepted Answer

To reduce inflation, the Fed would need to implement contractionary monetary policies, which typically include increasing interest rates. This would make borrowing more expensive, leading to a decrease in aggregate demand and consequently a decrease in inflation. However, the increase in interest rates would also lead to a decrease in investment and consumer spending, causing a rise in unemployment. Therefore, the correct choice is an increase in unemployment and an increase in interest rates, which is option C.

Question 14

The body of economic thought associated with David Ricardo is called new classical
economics.

Accepted Answer

The body of economic thought associated with David Ricardo is called classical economics, not new classical economics. New classical economics is a more recent school of thought that emerged in the 1970s.

Question 15

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point c. A Keynesian economist would advocate

Accepted Answer

The answer of Figure 17-3 
-Refer to Figure 17-3. Suppose...

Question 16

Suppose the economy is initially in long-run equilibrium. Now suppose oil prices rise sharply and at the same time, policymakers pursue expansionary monetary and fiscal policies. Which of the following will occur as a result of these two events, given that supply-side effects dominate demand-side effects?

Accepted Answer

With the rise in oil prices, production costs for businesses increase, which shifts the aggregate supply (AS) curve to the left. At the same time, expansionary monetary and fiscal policies stimulate aggregate demand (AD). However, given that supply-side effects dominate demand-side effects, the shift in AS will outweigh the shift in AD, causing a decrease in real GDP and an increase in the price level. Thus, the best choice is D.

Question 17

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

Accepted Answer

The answer of Figure 17-3 
-Refer to Figure 17-3. Suppose...

Question 18

New Keynesian economics is built on
I. the Keynesian approach
II. the monetarist approach
III. the new classical approach

Accepted Answer

The answer of New Keynesian economics is built on
I. the...

Question 19

The classical school focused on the long-run forces that determined an economy's
potential level of output.

Accepted Answer

The classical school of thought emphasized on the long-run determinants of an economy's potential output, such as productivity, technology, and resources.

Question 20

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point c. A classical economist would advocate

Accepted Answer

A classical economist would advocate allowing the economy's self-correcting mechanism to move the economy to point a, as they believe in the concept of automatic adjustment in the long run without any government intervention.

Quiz 17: A Brief History of Macroeconomic Thought and Policy

Which of the following policies would supply-side economists favor?

In 2009, the Obama administration advocated and Congress passed a massive spending and tax relief package of about $800 billion to stimulate aggregate demand. This policy would be favored by

A 2010 survey of economists suggested that the _______ approach is the preferred approach to macroeconomic analysis.

The worst economic downturn in the United States in the twentieth century occurred during the 1930s.

In the early 1990s, although the U.S. economy was in a recession, Congress rejected the idea of using an expansionary fiscal policy to close the recessionary gap. What was the reason?

New Keynesian economics

Classical economics is based primarily on the works of John Maynard Keynes.

Which of the following was not an explanation for the lower volatility of the U.S. economy during the 25-year period that preceded the Great Recession?

Suppose the economy is initially in long-run equilibrium. Now suppose oil prices rise sharply and at the same time, policymakers pursue expansionary monetary and fiscal policies. Which of the following will occur as a result of these two events?

In 1979, the CPI rose 13.5%, the highest inflation rate recorded in the twentieth century in the U.S. Public opinion polls in 1979 consistently showed that most people regarded inflation as the leading problem facing the U.S. How did the Fed respond to this situation?

The body of economic thought associated with David Ricardo is called new classical economics.

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point c. A Keynesian economist would advocate

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from

New Keynesian economics is built on I. the Keynesian approach II. the monetarist approach III. the new classical approach

The classical school focused on the long-run forces that determined an economy's potential level of output.

Figure 17-3 -Refer to Figure 17-3. Suppose the economy is at point c. A classical economist would advocate